Month: March 2011

In brief, the answer is “NO”. Many believe taxing offshore casinos and allowing them to legally take USA customers is the future of online gambling. The Federal government is currently starved for revenue, and any sort of income – be it from gambling or otherwise – is better than nothing. Unfortunately, the idea of trying to efficiently tax an offshore gaming operation each year is not realistic. There are many hurdles in the way of this proposed alternative to the current “illegal” status of online gambling in the USA, some of which are practically insurmountable.

It’s no secret that the WTO (World Trade Organization) has made it clear that the USA violates its GATS (General Agreement on Trade in Services) policy. In a landmark 2007 decision, the WTO essentially split the difference in the dispute between Antigua and Barbuda and the USA: The Federal Wire Act and two other statutes did violate the WTO’s GATS policy, but at the same time, the WTO agreed with the USA’s argument that the prohibition of online gambling was in the best interests of the public’s health and morals. Antigua and Barbuda later filed a $3.7 billion dollar lawsuit against the USA, which ultimately went nowhere.

If offshore casinos were legalized on the condition that they pay tax to the USA, there might be some law abiding operations that agree to this policy. Most offshore casinos, however, would simply disagree with any attempts to levy tax on their businesses, because taxation would significantly cut into their revenues. Instead of closing up shop, they would relocate to jurisdictions the USA can not tax; or, they would just not comply at all and continue operating as they have been in recent years with impunity. In reality, the average USA gambler wouldn’t know whether or not the casino site they’re patronizing pays taxes to the USA, and the USA could not start blocking non-tax-paying websites due to WTO policies.

The reasoning behind this thought is commonsense. If law abiding casino “A” pays 20% of its revenues to the USA, while law breaking casino “B” pays NO taxes to the USA, it’s clear that casino B would have an unfair advantage over the competition that allows itself to be taxed. Casino B would essentially have 20% more revenue at their disposal, and could lure customers away from taxed casinos with bigger bonuses, better promotions, or other perks resulting from flouting USA tax law.

While it’s true that Casino B might have more difficulty processing payments – since they would not be recognized by USA credit card companies as a legal online casino – ultimately the taxed casinos would fare worse than those that remain operating untaxed. The cost of uncoded credit card processing, which allows USA gamblers to currently gamble offshore, would never rival a 20% tax rate. Casinos would examine which scenario would yield more profit and then choose accordingly: get taxed as a legal USA casino and lose substantial revenues, or evade taxation and continue to process payments illegally.

Accuracy of Offshore Casino Revenues and Profit Amounts Is Almost Impossible to Track

Finally, would every offshore casino subject to USA tax law really paint an honest picture of its revenues and profits? The USA would have to rely on the good nature of casino operators to report accurate numbers each year. Undoubtedly, these numbers would be fudged in the interests of paying less tax, and there’s not much the USA could do about the situation since the business does not operate within USA legal jurisdictions.

An “Honest Abe” approach to collecting tax from offshore casinos would never succeed against human nature and the ability to move money to secret banking districts (Panama, Switzerland, Cayman Islands, Liechtenstein) that would shield a casino’s true income amounts.

What Is the Only Way Forward?

After debunking the thought that the USA could actually make money from offshore casinos, it makes sense to offer a solution to the problem at hand: compelling online gambling businesses to pay tax.

Surprisingly, the solution is simple: ignore the offshore casinos altogether, and start licensing, regulating, and taxing online casino operations in the United States, where consistent law enforcement would deter tax evasion, accounting tricks, or secret bank accounts. Yes, your favorite offshore gambling site would fold up over night, since it could never compete with major USA corporate casino operations that would flush billions into marketing and business development; but that’s the relatively small price we will all have to pay if online gambling ever becomes legal in the USA. Similarly, it’s no surprise that the token loss of the offshore gaming industry wouldn’t give lawmakers a second thought, either.

Fingers were crossed for the passage of New Jersey’s much anticipated online gaming regulatory bill that was sent to Governor Chris Christie’s desk for approval. Unfortunately, Christie vetoed the bill, sending it back to the legislature with a mandate for a public referendum. Christie believes that if the people of New Jersey really want online gaming, they’ll vote accordingly. Christie’s “bet” is the bill will get voted down, citing a 67% unfavorable opinion of online gaming among New Jersey citizens.

What does this mean for online casinos, sportsbooks, horse racebooks, and poker rooms? Essentially it is yet another snag along the way towards full legalization of online gaming in the USA. Many believe that if New Jersey approves its groundbreaking bill, other states will follow suit. It’s no secret that Nevada is aching for some sort of additional state revenue. The casinos in Reno and Las Vegas are chomping at the bit to launch their own online casinos; and many already offer “free play” online casino games to whet the appetites of serious gamblers.

If states began to pass pro online gaming legislation, legal issues with the Federal UIGEA (Unlawful Internet Gaming Enforcement Act) of 2005 would almost certainly crop up. Many family-friendly Republican lawmakers already have national online gaming bills in their cross hairs, lying in wait for the chance to shoot them down. On the other side are Democrats like Barney Frank, D-Massachusetts and former chair of the House Banking Committee, who are pushing hard to get the UIGEA overthrown. Frank and fellow supporters cite the creation of high technology jobs and additional tax revenue as reasons for legalizing online casinos in the USA.

The entrance of corporate online gaming companies (Caesar’s Entertainment, MGM, Wynn Resorts) would ultimately lay waste to the offshore casino business, currently satisfied with the status quo, despite continued problems processing payments from USA based customers. Small offshore gaming operations could never compete with multi-billion dollar casino conglomerates, and their demise would happen almost overnight. Further, USA players would eventually abandon offshore gaming websites anyway, favoring well known casino brands with fast payment processing, larger jackpots, and quick payouts. Think about it: would you feel more comfortable playing at XYZ Online Casino based in Panama, or Wynn Online in Las Vegas? The answer is obvious.

To be sure, there is still much work to be done: online gambling reamins illegal in the USA, even if multiple states have new legislation in the works. Moreover, it is very low on the National list of priorities facing the Republican controlled Congress. Lawmakers are eager to cut spending and start battling President Obama on the recent Health Care Act, dubbed “Obama Care”. Then, there are the two wars being waged Iraq and Afghanistan. The continued flow of billions of tax dollars to these conflicts concerns many legislators. As a result, it’s not surprising that legalizing online poker or casino games would be low on their list.